Drawbacks of an ETF Portfolio

There are many advantages to ETFs but they aren't suited to every investor, especially not if you're a dollar-cost averager. Dollar-cost averagers contribute small amounts of money on a regular basis, and this can be disastrous if you're buying ETFs because every buy and sell order creates a transaction fee. For example, if you contribute $100 per month to a particular ETF and each transaction costs $10, you are instantly losing 10% of your investment every month. Index Funds are a great alternative for dollar-cost averagers. Like ETFs, they track broad indexes but don't charge transaction fees when you contribute more money (more on Index Funds below).

Many ETFs don't do as well as the index that they track so be sure to chart and compare your ETFs to their peers and to their index before you buy (I'll explain how to easily do this below). The most common reason for performance lag is expenses, you can't expect your ETF to track the S&P 500 accurately if it has a 2% expense ratio. There can also be other factors such as poor management or inaccurate rebalancing, but the bottom line is avoid ETFs that don't accurately track their index.

Like stocks, ETFs are very easy to trade. They don't require any minimum investment, they can be traded any time that the market is open, and you can buy and sell as frequently as you like. This makes it tempting to try to time the market or chase returns, and also creates a lot of transaction fees that eat into your profits. ETFs are designed for buy-and-hold investors, they can be very expensive if you trade frequently.

There is a much wider range of ETFs available today, and many are very specialized. Specialization often means an ETF is tracking a much smaller basket of stocks so they tend to be more risky and volatile. If you invest primarily in these sector and specialty ETFs, you're giving up your greatest advantage as an ETF investor, diversification. Stick with the broader indexes, don't give up diversity to try to squeak out an extra 1 or 2% gain, chasing returns backfires every time.
One of the capital gains burdens that you're going to have to deal with on a regular basis as an ETF investor is dividends. They are taxable, and they are unavoidable if you're trading stocks and funds. Fortunately dividends do provide a benefit that offsets the tax liability that they create. Even though you'll have to pay taxes when a company passes you part of their profits in the form of dividends, they are also boosting your returns.

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Energy ETF

It doesn’t take an experienced investor to recognize the potential in almost any energy ETF. Why not? Just consider that there are environmental movements as well as financial indicators that all seem to point towards an energy ETF as an almost "sure thing" which now that I've said guarantees a decline!

For example, a natural gas ETF is something that is going to inevitably yield some impressive returns simply because the industry is positioned to expand and grow by more than 60% within the next two decades.

Also consider that almost all professional investors and market experts are suggesting that all portfolios should contain some sort of energy investments, and that an energy ETF is a great way to get the proverbial foot in the door.

This is because the authorized participants can usually get their investors involved in large energy companies and also with smaller firms too, and usually all in the same fund. This means that a startup alternative supplier may be included in a portfolio that also has holdings in a massive, global energy ETF as well. Clearly, it is this kind of diversity that is so essential to profitable holdings.

Something to remain extremely mindful of when considering any energy ETF is the fact that there should be no over-concentration within any specific sector or category. Yes, the natural gas industry may very well boom in the coming decades, but an investor should not try to benefit from this anticipated growth spurt at the cost to other options and subsector investments. My preference is to ensure that a fund is diverse and balanced which I like to believe is a reasonable approach to profit.

For instance, energy means clean energy, oil and gas supplies, and other natural resources. It is also a wise idea to understand that the ETFs might offer a great "package deal" that touch on firms of many sizes within a single segment, but there are also a few other ways to access the energy market. For instance, there are machine and equipment segments, exploration and production options, and there are the much narrower funds that focus on things like wind or solar power too.

Do a bit of research and comparison shopping when considering any of the energy ETFs. Choose only those that are clearly focusing on the future potential of the energy industry, but which are not losing out on the rapid changes happening today. Often, this means doing a bit of math to ensure that no single company or area of a fund consumes over five percent of the total portfolio – regardless of how profitable it appears.

What are some good options? PowerShares Dynamic Oil and Gas Services (PXJ), iShares S&P North American Natural Resources Sector (IGE), and iShares S&P Global Energy (IXC) are extremely popular.

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Why Would I Buy an ETF?

Most people that are new to investing are curious why there has been such an explosion in ETF popularity in recent years. Part of this is because of their flexibility, you can find a coinciding ETF for just about any type of stock, industry, geographic region or strategy that you'd like to try. You can usually own a share of the Wilshire 5000 or any other index that ETFs track for as little as $50. Can you imagine the cost if you tried to buy one share of every stock in the Wilshire 5000? Even if you could afford to buy a few shares of all 5,000 stocks, the transaction costs would make it a waste of time.

The fact that you can own a broad index when you buy into an ETF also means that you get diversification at a reasonable price, the cost of a single share. Your share will be spread over the same wide range of industries, categories and geographies as the person that owns 1,000 shares, you get the same diversification for 1/1,000th of the price.

ETFs have created an affordable way to have a professional grade portfolio that will outperform the majority of investors. A discouraging statistic for active investors is that only 20% of professional money managers beat the market returns, and this percentage is even lower for the average individual investor. ETF investors are guaranteed at least the market return for the indexes that their ETFs track so they can easily beat 80% of investors as long as they stick to the broader indexes and diversify.

Since an ETF only needs to track an Index, the fund manager will be doing a lot less buying and selling. This doesn't require a Harvard MBA and a team of analysts, the fund just rebalances occasionally to match the index that it tracks. This is why management and administrative expenses are much lower for ETFs than for the average mutual fund.

In addition to being expense efficient, ETFs are very tax efficient as well. Since trading creates the majority of tax liability, and ETFs trade infrequently (only when their index changes), they are much more tax efficient than traditional mutual funds.

You've probably heard that last one a hundred times, but here's a bit of tax info that is less well known and often misunderstood Many of the broader indexes, such as the S&P 500, track the largest and most successful companies in America. How do you get booted from S&P 500? If a company performs poorly and their market capitalization decreases (a fancy way to say the stock price drops) dramatically, they will be replaced. How does this create another ETF tax advantage? If a stock's price is dropping it is losing money. If the index (and your ETF) is only replacing stocks that are losing money, there is no capital gain to pass on to investors.

Finally, ETF investing is a low maintenance passive strategy that is easy to learn and implement in comparison to other investing strategies. What do I mean by low maintenance passive strategy? I mean you can choose several ETFs that track different broad indexes and then buy and hold and hold and hold. The simplicity of the strategy is a big perk, especially when you consider that experienced ETF investors beat most professional fund managers.

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Technology ETF

If you are interested in accessing a popular sector of the investment market, you should consider a technology ETF. This is going to be an investment that can result in exposure to companies involved with the Internet; computer hardware and software; telecommunications; and even semiconductors.

As we saw in 2009/2010 with the financial sector, no market segment is 100% protected from downturns and that includes the technology space. In fact, years before the financial meltdown there was a technology meltdown with many sure-bets falling apart. Despite the risks, one could argue that no other industry is positioned for as much innovation and therefore growth as technology.

Be aware that many technology ETFs have another layer of specialization so don't assume that what you're buying will automatically cover everything from software to semiconductors.

Some broad US-based options include iShares Goldman Sachs Software Index (IGV), iShares Dow Jones U.S. Technology Sector Index Fund (IYW), and Vanguard Information Technology ETF (INT). If you're looking for more global exposure, look into the iShares S&P Global Technology Sector Index Fund (IXN). My preference is to start broad and if the weightings are somehow out of whack, then consider more specific options.

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Small Cap ETF

In order to understand the appeal of a small cap ETF, it is necessary to understand what this type of investment actually is. We all know about companies like IBM, Citi, and Exxon because they operate globally, employ hundreds of thousands of people, and make billions of dollars a year. But smaller companies i.e. those with small market capitalization or small caps for short are another viable option for investors to consider. Small caps tend to focus on the markets in which they operate whether that is in the US or abroad.

When an investor is hoping to round out a portfolio with exposure to up-and-coming companies or ones that are more closely tied to local economies they should turn their attention to a small cap ETF. Their size tends to translate into limited capital and reach beyond immediate borders. Of course this isn't a hard and fast rule with web-based companies able to cross borders with relative ease.

International small caps also provide the additional variable of being more closely tied to currency fluctuations in the region they operate in. Depending on your perspective this can be a good thing or a bad thing. Weaker currencies can offset gains can vice versa so be sure to examine the potential impact before investing.

One thing I like about small cap ETFs is they allow me to get broader exposure to the market -- the US in particular. With market-cap weighted ETFs like SPY, a significant portion of the investment dollars go towards a relatively small percentage of the companies. Investing in a small cap index fund in effect adjusts that weighting to make it more proportional. Combined with a mid-cap ETF you get more control than you would with a single ETF that attempts to cover all bases by tracking something like the S&P 1500.

Some small-cap ETF options to consider include the iShares S&P SmallCap 600 Index Fund IJR. iShares also offers value (IJS) and growth (IJT) variations of this ETF.

For even smaller companies, be sure to check out Micro Cap ETFs.

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Natural Gas Prices At Attractive Levels For Long-Term Investors

Natural gas bulls have been touting for years that natural gas is the fuel of the future, and, therefore, there is only one direction for price to go, and that is up. However, price activity over the last two years has definitely not been straight up. While there are many significant scientific advantages to natural gas, natural gas prices will still fluctuate according to the same basic economic principle that every asset adheres to -- supply and demand.

Investors and analysts who believe Natural Gas is a promising long-term investment tend to predicate that conviction on several key points:

The U.S. Energy Information Association has projected that Natural Gas consumption will increase by 64% by 2030. Thus, demand is expected to increase.There is only a limited supply of oil available and there are major environmental concerns surrounding the use of coal and nuclear energy, which means there will be an increased demand for natural gas alternatives. Again, demand is expected to increase.

Most experts expect U.S. consumption of natural gas to increase only marginally over the next 20 years, so much of the increased demand for natural gas alternatives will most likely come from countries outside the United States.

Currently, the two largest producers, by far, of natural gas are the United States and Russia. Combined, the two countries produce roughly 40% of the world’s natural gas. Forex trading, in general, is not directly impacted by the ebb and flow of natural gas production, but, specifically, Russia’s currency can tend to be impacted in the near-term by natural gas supply/demand levels.

Investors who want to position themselves in order to take advantage of a possible rise in natural gas have several options. First of all, they could buy and hold specific companies that specialize in the exploration and production of natural gas. Secondly, they could go straight to the commodity or futures markets, or thirdly, they could invest in an exchange traded fund.

United States Natural Gas Fund (UNG) is a fund that seeks to track price movements of natural gas by percentage.First Trust ISE Revere Natural Gas Index Fund (FCG) is a fund that seeks returns which correspond to price and yield of an underlying equity index called the ISE-Revere Natural Gas Index.SPDR S&P Oil & Gas Exploration & Production ETF (XOP) seeks returns that basically mirror the performance of the S&P Oil and Gas Exploration & Production Select Industry Index.

ETF’s can serve as an integral part of a long-term investors investment portfolio, and current natural gas price levels look attractive for long-term investment. Natural gas demand definitely has the potential to significantly increase in the future. A forex account can be used to track how currencies are moving in relation to fundamental developments that affect natural gas prices.

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Managing Investment Expenses

Investing expenses can quickly eat into your earnings, especially if your portfolio is still relatively small. There are many types of expenses but the most dangerous to your portfolio are transaction costs, taxes, and investing information costs.

Transaction costs come in many forms but they all chip away at your returns, especially if your average transaction is small. This is how regular and online brokerages make money, they charge you when you buy and sell stocks, bonds or mutual funds.

These fees vary greatly, but one important piece of information I can share with confidence is that it is much more expensive doing business with a local financial planner or broker. They usually charge $35 or more per trade regardless of what type of investment you buy. In addition, planners will charge you for various services or by the hour, depending on the planner, and that can run into the thousands. They also tend to push the funds that pay them the biggest commissions. Beware the planner that ever pushes a fund loaded with fees and expenses, there's no reason to pay them now that you can trade them online for free (see the Mutual Funds Basics guide to learn more about No-Load Funds).

In contrast, the typical online trade is around $9.99 for stocks and most funds trade for free. Brick and mortar brokers and planners justify their much higher transaction fees by saying you are paying for their expertise, not just the transaction. Not many earn that extra money. Great investment advice is pretty cheap nowadays, some of the best investors in the world provide investment advisory services that cost less than $200 per year. There are always exceptions, so if your local planner is great, keeps fees low and outperforms the market, by all means, stick with him. While $9.99 online trades are much cheaper, they can still add up. Take my advice and keep track of all your fees, avoid local brokers and planners, and buy and hold as long as possible unless you've picked up a real dog.

Taxes are another large expense for those of us with portfolios in a taxable account. My first piece of advice is to stick every penny you can into tax deferred accounts (read the 401K, IRA and Roth IRA Basics guide to learn more about tax deferred accounts). This will allow your money to grow tax-free until you retire which will save you a fortune in tax expenses. If you can't put all of your savings into tax deferred accounts, the best way to keep your tax expense low is to hold your investments for as long as possible. Why? If you hold an investment for at least one year before you sell, you only have to pay the long term capital gains tax on the profit which is 15% for most of us and 5% in the lowest tax brackets. If you don't hold your investment for at least a year, you will pay your normal tax rate which can be as high as 35%. Long story short, buy and hold.

The last category, investing advice expenses, consists of the price you pay for whatever type of investing advice you buy each year. It can consist of financial planning, web site subscriptions, monthly investing newsletters, investing classes, and magazines subscriptions to name a few. I can't imagine how you would ever need to spend more than $1,000 per year to get great information. Spend even less if you are a beginner and your portfolio is still small because these expenses cut into a much larger % of your profit.

Of all the different types of investing costs, investing advice expenses are the easiest to manage if you do a little research before you buy. Here are a few tips to help you save money but still get the best investing advice available.

Keep up with the market and the economy:

A 12 month subscription to Smart Money published by the Wall Street Journal only costs $14.99 per year. This magazine contains outstanding content similar to the journal with a little more emphasis on personal finance articles than the Journal.Kiplinger's Personal Finance costs $19.99 per year. Despite the title, this magazine focuses on both the market and personal finance. Great content plus a lot of educational material.Money Magazine $14.99 per year. This magazine contains a little something for everyone, you can always count on each issue to emphasize a different aspect of personal finance and investing. Like this site, they shun the ivory tower mentality. Their publication is a fun and easy read and it always provide a lot of high quality educational content.A weekly subscription to the Wall Street Journal is $99 per year. Heavy emphasis on everything market-related. They can tend to focus on what's hot but the Journal contains a lot of solid and timely analysis.

Investing Advisory services that provide specific buy/sell recommendations and model portfolios:

Equity Fund Outlook for Mutual Funds $149 per year. Edited by renowned fund expert Thurman Smith. Emphasis split between tax deferred and taxable accounts. Provides strategy, model portfolio and specific buy/sell recommendations.Fund Street and ETF World Investor© for Mutual Funds and Index Investors $149 per year. Proven market beater that provides a lot of market analysis and investment/personal finance tools. Emphasis on long-term growth and Index/ETF funds. Provides strategy, model portfolio and specific buy/sell recommendations.The Prudent Speculator for Stocks $195 per year. Market beater for over 25 years. This seasoned investing team is led by Al Frank's protégé and successor, John Buckingham. Emphasis on growth stocks. Provides strategy, model portfolio and specific buy/sell recommendations.

Financial Planners:

If you feel you need a planner to get started, consider trying an hourly planner out rather than the more traditional fee-based planner. They claim you pay a premium for expertise so that's all you should use them for. Don't go through them to buy or sell stocks or funds, just get their advice at a reasonable hourly rate and don't go back if you don't feel you got your money's worth. Generally they are worth the dollars spent if you need help with advanced estate planning, insurance planning, or tax planning.

Investing Education Classes:

Typical investment workshops, seminars and courses cost anywhere from $1,000 to $5,000 and I've yet to see any material that you couldn't have gotten on line for free or at your local bookstore for $20. In addition to ETFTopics.com, there are many other similar sites that offer high quality free information on related topics. Why pay thousands when there's so much great free (internet) and inexpensive (bookstore) investing information available?

Data, charting, and investing analysis web site subscriptions:

Hopefully you'd prefer to at least validate the recommendations you're getting from your advisory services. Since all investing research sites are different and can be tough for the newbie, I'm only going to recommend my favorite and most user-friendly, Morningstar.com. They have a great variety of free investing tools, so check out the free stuff before you sign up for the paid service. Even if you decide to buy, the subscription is only $14.99 per month and it includes exceptional tools for screening, researching, and selecting stocks and mutual funds. If you want to learn more, read Morningstar.com, the Power of Institutional Investors at your Fingertips guide.I highly recommend the approach above (i.e. learning to validate your advisory service's stock and fund selections), but if you don't plan on doing much of your own research and analysis, don't join a pay site. In-depth research and analysis services are wasted on the casual investor that simply buys the stocks, bonds and funds that his advisory service recommends. This type of investor will generally only need to look up quotes, charts, financial results, news and other basic information. If this is you, invest your money at any of the major online brokerages, they will have all the tools the casual investor will ever need.

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What's In a Name?

Apparently marketing is a live and well even in the world of exchange traded funds (ETFs). Aside from the typical advertising you might come across on TV, in a newspaper, or on the web, ETF providers are purposefully targeting specific ticker symbols for that little extra name recognition.

Here are some examples:

Rydex Russell Top 50 ETF which invests in the largest publicly traded companies uses the ticker XLG. The original choice was BIG, but it was already taken.Looking to invest in the most liquid corporate bonds? Check out the Rydex Russell Top 50 ETF which uses the symbol LQD.StreetTracks Gold Trust uses GLD. That's a an obvious one. iShares Comex Gold Trust on the other hand uses IAU. If you remember studying the periodic table you'll recall that AU is the symbol for gold.The Vanguard Telecommunication Services ETF uses the symbol VOX which is the short form for voice operated switch.We also have VCR which is the symbol for the Vanguard Consumer Discretionary ETF whose largest holdings are in broadcasting and television.And finally there's PBJ. While not directly related to every child's favorite sandwich, it is the symbol for the PowerShares Dynamic Food & Beverage Portfolio.

My only hope is that these fund owners are as creative with their investment strategies!

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Fixed Income ETF

A fixed income ETF provides a way to access arguably more stable and reliable bond market with relative ease. As an ETF as the investment vehicle also brings with it diversification as each fund will typically hold dozens if not hundreds of different bonds at any given time. Prior to such an option, the average investor would be unable to manage such a portfolio and it would be incredibly expensive to do so because of transaction fees.

Fixed income ETFs may also be of interest to those that are looking to limit volatility both over the short or long term. For those that are approaching retirement, volatility is a key factor as there is less time to recover from a dip as compared to younger investors.

Another use for such ETFs is as way to maintain liquidity of your assets similar to using a money market account while also taking advantage of a greater return. Unlike individual bonds that require you to hold them for a specific duration, fixed income ETFs allow you to buy and sell when it suits. Do watch out for transaction fees!

As is always the case, no single ETF is the ideal answer for all people at all times. Firstly, the investor has to do a bit of research to determine if a short or long term fund is the right choice for their needs. Before jumping into the fixed income funds, it is up to the investor to perform the necessary due diligence particularly by reviewing the prospectus.

There are a number of options in the fixed income category and numerous providers including iShares with different offerings. For the lowest level of risk (with corresponding lower potential) consider treasury-based ETFs such as but iShares Lehman Year Treasury Bond Funds which have a short (SHY), medium and (IEF) long term (TLT) focus. With more risk comes the potential for greater returns so investors in this category might want to consider iShares Aggregate Bond Fund (AGG).

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Are There Dangers With Investing Only In ETFs?

Rolling over a sizable ($200k+) traditional IRA from a previous employer and don't have much time to pick investments. Found a collection of 12 ETFs that result in much more diversity than just the S&P 500 (small vs large; international vs US; value vs growth). Not interested yet in bonds since I still have 20+ years until retirement. Figure the ETFs will minimize annual expenses vs mutual funds. I do plan to rebalance annually using a discount broker and review prospectus information. My question is if this all seems reasonable or if I'm missing something about ETFs or good portfolio management practices in general that I should reconsider before I dive in.

Adam J answered:
Nope, that's entirely reasonable. That strategy will cover you against anything but a massive depression (which you have plenty of time to ride out) or a sizeable planetwide catastrophe (in which case your IRA will be the last thing you'll be worrying about).

And I'm not betting on the depression--while I could see a recession or two, advances in biotech, nanotech and computer science should keep the market moving upward at a solid pace.

Zenthema answered:
I don't see anything wrong in ETF's as long as you watch and trade them. Money in the stock market is at risk. You can't just let it sit..things go up and also down. You need to monitor prices and also get some
education in trading.

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Investor Psychology: Don't Follow the Herd

I define Investor Psychology as the herd mentality that is so obvious when you watch short-term stock market behavior. It seems that most investors are willing to follow each other up mountains and off cliffs simply because that's what everyone else is doing. There are tons of outstanding examples to illustrate this lemming-like behavior, but we'll go with Google (GOOG) since it's a company almost everyone has heard of.

3/17/08:
Bear Stearns, a major investment brokerage, made some very bad bets on sub prime mortgages and was on the brink of bankruptcy. JP Morgan Chase and the Federal Reserve Bank announce a deal to buy out the troubled brokerage on 3/17. JP Morgan winds up paying an unbelievable $10 per share for a stock that had traded for $100+ per share only three months before.

Some professional analysts and news pundits begin clamoring that we can "expect to see multibillion dollar companies falling like dominoes in the weeks and months ahead." They pronounce that we "may be going beyond recession and into a depression" and that "the inevitable crash we're experiencing is a result of the worst liquidity and banking meltdown this country has ever seen." Many investors panic and immediately flee the market thinking cash, treasuries, and bonds are the safer bet until they can figure out what the market is going to do.

As a result, Google's stock price plummets by 4.12%. $5.7 Billion in Google shareholder value (market capitalization) is lost in a single day. Wait a minute Google is a global company, not just a US company and they're not even in the financial sector, right? Right. And Google continues to post strong earnings, great growth and is dominating their competitors in market share and revenue growth, right? Right. Google still has the same solid management in place and isn't in any sort of financial, litigation, or other major trouble either, right? Right. So what the #^% happened? In short, investor psychology. When people panic you see a lot of short term fluctuation in share prices as a result of their behavior.

3/18/08 One day later:
The Federal Reserve Bank holds its monthly meeting and slashes interest rates by 75 basis points. They calm fears by reminding people that inflation is in check, promise to keep pumping cash in to ease the liquidity crunch, and demonstrate again that they are willing to do whatever is necessary to stabilize the economy and avoid a prolonged recession.

Professional analysts and news pundits are clamoring again but this time they tell us that the Fed is making some brilliant moves. "They have revived measures not used since the great depression, pumped over $200Billion dollars into the system to ease liquidity, and gone on the most aggressive rate cutting spree we've seen since the early 1980s banking crisis." They assure us that the Fed has done so much that we are going to see strong price action in the coming weeks and months and are likely to avoid a recession. The same investors that panicked yesterday panic again, but this time they are flooding back into the market for fear of missing out on a big rally (which they ironically create).

Only one day later, Google's stock price soars by 4.59%. $6 Billion in Google shareholder value is created in a single day. Do you think Google's true value really changed so drastically in a two day period? Of course not. There is simply a lot of volatility in the short term, which is why we want you to understand a little about investor psychology, so you can avoid the herd.

In the example, the herd sold on the way down and bought on the way up. If you buy high and sell low you are guaranteed to lose money. Unfortunately we are programmed to act this way, your mind will try to get you to make stupid stock market moves whenever you are scared or stressed, you'll have to make a conscious effort to avoid these mistakes. Warren Buffet once said "simply attempt to be fearful when others are greedy and to be greedy when others are fearful" and we think that is brilliant advice.

To avoid all of this unnecessary stress, master your own psychological impulses. Hold on to your winners for as long as you can, at least a year, and don't let short-term market volatility scare you into or out of the market. Why? Long term investors win, short term investors lose, and that's not a theory, it's a fact. Also, avoid bouncing between strategies when the market changes, reacting to news, or trying to time the market by moving back and forth from cash to stocks. If you understand your strategy and are good at implementing it, you should wind up with high quality stocks that you bought at a good price and that you can hold onto for a long period of time.

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Natural Gas ETF

We all know that some of the world’s primary energy supplies are also finite in quantity. For example, there is not an unending supply of crude oil available, and this is forcing the world's leading consumers of petroleum products to direct a lot of energy and attention towards alternative supplies.

The world is in this constant need of different energy supplies and that is a primary reason to consider an investment in a natural gas ETF. Consider that the United States Energy Information Association has stated that natural gas usage is forecast to increase by more than 60% by the year 2030. This alone would point towards a natural gas ETF as a savvy investment, but it doesn’t mean that investors should consider only the producers of natural gas as a place to direct their investment dollars.

Consider that Russia and the United States are the world’s current leaders in production of natural gas, but the demands of the market indicate quite clearly that there is going to be a call for expanded exploration and production of natural gas in general. This means that other countries, corporations and businesses will be diving headlong into the industry as well, which could translate into strong investment opportunities for knowledgeable fund managers.

Investors can also identify authorized participants offering a natural gas ETF tied to exploration and production, equipment and service companies working in the industry, through commodities investments, and even in leveraged ETFs that give investors exposure to the industry in a variety of ways.

Natural gas ETFs include United States Natural Gas Fund (UNG), First Trust ISE-Revere Natural Gas Index Fund (FCG), and PowerShares Oil & Gas Services Portfolio (PXJ).

A bit of research is often essential in selecting the appropriate choice for any particular investment goals, but the natural gas market and related industries are positioned for growth. There are short and long term options as well as choices within various parts of the industry, and it is up to the investor to decide which is suitable to their needs.

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Health Care ETF

The cost of health care tends to be a rather sore subject, but few people would argue that the industry in general has experienced massive growth over the past few decades. Few would also argue against the opinion that it will only continue to grow or develop at this same pace far into the future. This means that someone who chooses to invest in a health care exchange traded fund (ETF) is going to have exposure to this highly lucrative industry as a whole.

Consider that health care is among the fastest growing sectors of the United States economy. While it is difficult to say that the as an investment health care will outperform, it seems safe to say that the risk negative returns is unlikely. And, of course, risk is further reduced through the diversification that a health care ETF can provide due to its holdings in multiple companies.

It is also interesting to note that a health care ETF can allow someone to offset or hedge against personal health care costs. For instance, someone with diabetes or a heart condition could perform some research to see which funds are investing in companies directly related to their condition. By doing this, they would be "paying themselves" through their health care costs via returns from their investment in the ETF.

Is it recommended to use a health care ETF even though it is more concentrated than a broad-based ETF that tracks something like the S&P 500? That'll depend largely on your investment style. If you're the sort of investor that watches the market and can dedicate time to understanding what might drive the health care sector up or down, then such an ETF could be right for you. And proper research will offset the added fees from higher expense ratios as compared to those of an ETF with a broader focus.

With sector ETFs it makes sense to review the prospectus to ensure coverage meets your expectations. You'll want to make sure that the investment manager hasn't overweighted holdings in a way that you disagree with. It takes only a short time to look at the data and to determine if the fund is suitable to the needs of the individual investor.

Currently, the more popular health care ETFs include iShares S&P Global Healthcare Sector Index Fund (IXJ), Vanguard Health Care ETF (VHT) and the ProShares Ultra Health Care ETF (RXL).

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Is It Safe To Invest In An ETF That Has Hardly Any Volume?

I am looking at this ETF SIH, it sounds good in theory but I noticed it has hardly any volume. I heard somewhere that ETFs hold their price based on supply and demand just like a stock, in that case shouldn't I be worried that there is not much volume?

Computer Games for Kids answered:
Stick with big name sponsors of ETFs. I'll clarify the point about supply and demand and market price of an ETF.

All exchange traded funds have what are called "authorized participants." They're authorized to create or redeem 50,000 shares of the etf directly with the trustee. Thus, they are in a position to arbitrage any difference between the Net Asset Value (NAV) of an ETF and its market price.

Say market demand does go down for an ETF, and so drops below the NAV -- then the authorized participant can get more shares of the ETF, because it's now a bargain. This raises demand in the marketplace, so price rises to meet the NAV.

This is a big difference between ETFs and ordinary closed end mutual funds. Closed end mutual funds can -- and usually do -- trade at either a discount or premium to their NAV.

So the direct answer is that yes, it is "safe" to buy this ETF. Its market price will not drop below the NAV.
Of course, this does not protect you from market price drops!

Ted answered:
Your big risk is giving up the spread when you buy and sell. This cuts into your profit.

I have never heard of the MarketGrader 100 Index. I have never heard of SPA ETF Inc. Judging by the volume, neither has anybody else.

If you want a general large cap fund, which is what this seems to be, why don't you go for one with a major sponsor like Vanguard or State Street? I don't see what's so special about this. Please email me if I'm missing something.

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Investors, Don't Panic, Everything's Going To Be Okay

Isn't it nice to hear some reassurance during a recession? Especially when the headlines have been doom-and-gloom for months. And it's true, we'll weather this storm, just like we've weathered every other recession for the past 80 years. If you're a long-term investor, your portfolio will recover.

You don't have to take my word for it, I wouldn't throw that kind of statement out there without providing you with some history and data to back it up. Hopefully this article will help you get some untroubled sleep tonight.

Don't believe the hype
The major media outlets are doing what they do best, painting this as the worst disaster in US history. Why? Because it sells papers, draws television viewers and attracts mouse clicks. The scarier the headline and the more dire the prediction, the more successful the story. Thirty years ago, we would have condemned any news journalist that used these kinds of irresponsible scare-tactics. Today, the news is forced to compete with other forms of media, so the line between news and entertainment has become very blurry. As a result, we've become accustomed to outrageous (often ridiculous) predictions of disaster and worst-case scenario analysis from people that we consider to be "newscasters" and "analysts".

We've all become a bit more cynical when it comes to the media, but it still takes a toll when all you see for months are predictions of disaster. We see our portfolios taking a beating, and this puts that little nagging doubt in the back of our mind "could everything they're saying be true? Is this the beginning of a 10 year global depression?" To compound the problem, it's human nature to try to one-up the competition. The negativity feeds on itself, today's headline is always going to be worse than yesterday's until the economy and the market start to recover.

Take heart
Mass media is an EXTREMELY poor predictor of future events. What happened yesterday and what's happening right now is the focus, the media is reactionary so you can count on the forecasts to always lag the actual market recovery. Take a little of Warren Buffett's advice to heart, "attempt to be fearful when others are greedy and to be greedy only when others are fearful." If the media is crying that we're on the brink of total collapse buy.

Stay objective
People are fleeing the market in droves, financial institutions are imploding left and right, we're embroiled in two costly wars, the dollar is weakening and inflation is much higher than it's been for a long time, right? I don't disagree with any of those statements, they're all facts.

How can I say things aren't so bad if I agree that all of those things are true? Because this is a recession, and things are always tough in a recession so I see no reason why this one would be any different. This is an inevitable part of the business cycle, albeit the most painful part. Every economic boom requires a bust at the end before the cycle can start over and we can experience the next expansionary phase.

But isn't this worse than all past recessions? Nope, it's milder than some and worse than others but it's far from the worst. It only feels that way because you're losing money. Stay objective, and when you start having doubts, let history be your guide.

So how about some history when have Americans faced greater challenges?

~ Our worst economic disaster was the crash of 1929. Back then, we were an emerging market. Ever own an emerging market stock? They define the word volatility. The crash of ‘29 and the 10 year depression that followed were dark times in America for the rich, poor, and everyone in between. In contrast, today we are the most developed economy in the world and we have sound fiscal and monetary policies, which is why our expansion periods (bull markets) are so much longer than our contractions (market corrections and recessions).

~ The 2000-2002 Tech Wreck was scarier than this recession. The scariest part of the tech wreck for me occurred right before the crash. Do you remember the euphoria in 1999 and early 2000 near the end of the greatest expansion that the US stock market had ever experienced? Pundits claimed that the tech boom created a new paradigm in business, "we would never have to experience another recession again because of the exponential growth potential of technology companies". That sounded like complete insanity to me and the crash that followed proved that people often lose their objectivity during strongly bearish AND strongly bullish conditions.

~ 9/11 was scarier than this recession. Prior to 9/11, most Americans spent very little time worrying about our national security. Terrible things happened in other places, they didn't happen here at home. On that fateful day, we were introduced to terrorism on an unprecedented scale and it happened on American soil. Our illusions of complete security at home were shattered in an instant and the market plummeted. At the time, we had no idea how deep or painful the economic and political fallout that followed might be. The fact that the market recovered only a few months later is a testament to America's will and resilience.

~ Black Monday was scarier than this recession. On a random Monday in 1987, the stock market experienced its worst one day drop in history, it plummeted over 20% in a single day. I doubt many brokers, serious investors or retirees living off of their portfolio slept well (or at all) that night. There was no logical explanation for what happened, and to this day, people still argue over the cause of the crash (for the record, I blame program trading!). Nerves were frayed for months afterward and market volatility reached unprecedented new highs as investors jumped in and out of the market trying to avoid being part of the next massive selloff.

~ Stagflation in the 70's was scarier than this recession. Stagflation was baffling for investors and economists when it first occurred in the 1970's. How could we be experiencing stifling inflation while we were also experiencing a prolonged recession? Theorists worried that recession coupled with inflation could only lead to one logical conclusion, a complete economic meltdown. At the time, there was no historical data to refute that conclusion. Of course, that didn't happen, but it sure created scary market and economic conditions for several years.

Those examples may have provided a little comfort but, personally, hearing how things could be worse never really makes me feel better. I'd rather hear why things aren't as bad as they seem, so here are a few historical investing facts that help me sleep like a baby

~ Every 10 year period since the end of the depression has produced gains. This is even true RIGHT NOW. That's right, even though we have the current recession and the tech wreck of 2000-2002 lumped into the mix, diversified long-term investors (such as those holding S&P 500 Index Funds) from 1998-2008 have a gain.

~ In the last recession, we faced an INVESTING bubble which created a valuation crisis. Since I'm an investor rather than a real-estate speculator, I'll take a housing bubble over an investing bubble any day. When the tech boom ended in 2000, every major index was sitting at a record high and stock valuations were through the roof. We were facing a valuation abyss, most stocks in the technology-laden NASDAQ were trading FAR above normal or realistic P/E ratios. We had a long way to fall back then, but we are in a very different position today. Did you know that the S&P had barely made it back to the levels of the late 90's before this recession started? We don't have that monkey on our back this time around, stocks are already starting to look pretty cheap from a valuation perspective, even to the bearish pessimists.

~ Today we are facing a HOUSING bubble, but comparisons are starting to overshadow losses. The major banks are experiencing massive losses as a result of questionable speculation and sloppy sub prime lending. What we have working in our favor is that comparisons are starting to look pretty good. The largest bank (no longer the largest) suffered a $10 Billion loss in Q4 ‘07 and a $5 Billion loss in Q1 ‘08. Analysts predicted that they would lose $3.1 Billion for Q2 but they beat expectations by only losing $2.5 Billion. In the last six days, the stock has gone up 43%. Wait! After announcing a $2.5 Billion loss the stock is UP? Comparisons are powerful and the media will almost always focus on recent performance, they rarely look further back than a year.

~ First Movers are starting to pour money back into the market. The financial sector has been beaten down the worst during this recession, and many companies are simply suffering from guilt by association. However, those that weren't involved in the worst of the risky speculation or sloppy sub-prime lending are now being rewarded. For example, JP Morgan has had decent volume for a couple of months and their stock price is almost back to break-even for the year. First movers are snapping up the best bargains.

Bottom line, this recession will inevitably end just like those that came before it. I'm not an oracle or an expert, and I have no idea when this recession will end, but I still feel comfortable telling you that "everything's going to be okay". The market can't always go up, it needs cooling off periods. The cooling off periods that are particularly steep, prolonged and painful are called recessions. We're experiencing one right now, but it's not the first or the worst and it won't be the last.

Stay objective, stick to your long-term investing strategy, and ignore the headlines and short-term market volatility. Buy and hold and hold and hold and in the future, when you're reading euphoric predictions of never-ending bull markets or dire predictions of decade-long global depressions, trust history, if you're a long-term investor, your portfolio will recover.

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Platinum ETF

Many consider the launches of gold and silver exchange traded funds (ETFs) to be successful so it comes as no surprise that speculation has increased about a platinum ETF. The main obstacle to such an ETF is that the market for is smaller and less liquid. So far London and Zurich look like the most likely launching grounds according to analysts of Resource Investor.

Aside from the purely speculative angle, the largest demand for platinum comes from the automotive industry (car exhaust equipment) and the jewelry sector. One of the largest suppliers, South African platinum isn't likely to exceed demand especially as governments worldwide tighten emissions standards which is expected to increase another 5% this year to 7 million ounces.

Earlier in November, platinum experienced its biggest one-day gain in 20 years and soared to an all-time high of over $1,400 an ounce largely due to the possibility of an ETF. The platinum ETF is expected to increase the metal's price between 5-15%.

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Online Investing vs. Traditional Financial Planners

Many individual investors are moving away from the more traditional broker and planner relationships of the past to self-directed online portfolios. This doesn't mean it's the right choice for everyone or that local planners no longer have anything valuable to offer, it only means that online investing is quickly becoming the most popular way for individual investors to manage their money.

Why is this happening? Partly because online brokerages are so easy to use. Even internet and investing novices can sign up, log on and start trading in less than an hour. This is very appealing to investors who would like to manage their own portfolio rather than going through a broker or planner every time they want to make a trade.

Another factor is that the internet is maturing rapidly. During the 80's and 90's the internet was transformed from a novel way to communicate and do business to the most powerful information sharing tool that the world has ever seen. As a result, there is more high-quality and inexpensive investing information available to the average investor than ever before. Investing research sites have also made huge strides over the last ten years. Beginning investors that are internet savvy can quickly learn to use investing research and analysis tools that are just as powerful as any used by investing professionals.

(Note: Local brokers are being pushed to offer more products and services to stay competitive. This means that even though financial planners still offer a wider array of services, the line between broker and financial planner is blurring. For simplicity's sake, we will use the term "planners" for the rest of this article to encompass both.)

Investors that switch from a local planner to an online brokerage, or vice versa, are sometimes disappointed because the actual experience doesn't match their expectations. Let's start by covering some common misperceptions to help you avoid this costly mistake.

Perception: You can't get the kind of high quality investing information you receive through your Financial Planner anywhere else.
Reality: This is definitely not true. You have access to tons of high-quality and inexpensive investment guidance if you need help making decisions (see our Can you afford outstanding investment advice? article for more on this subject). If you prefer to do your own research, you also have affordable access to investing research sites that provide tools as powerful as any used by professional investors (see our Morningstar.com: The Power of Institutional Investors at your fingertips article for more on this subject).

Perception: Local Financial Planners overcharge.
Reality: In general, yes, local planners do charge much more than an online brokerages but there are a few specialized services that they can provide at competitive prices. For example, if you have advanced estate, tax, and insurance planning questions, an hourly financial planner is a cost effective option. You'll also find that many online brokerages are not equipped to handle advanced planning needs.

Perception: Only a planner can help me with advanced topics such as estate, tax and insurance planning.
Reality: A few online brokerages offer these specialized services but unless you have a very large account ($500,000+), you will pay just as much for "managed account" services as you would for any local planner. Again, do your homework, an hourly planner will probably offer these advanced services at competitive rates and you will get the added benefit of a personal relationship and face-to-face interaction.

Perception: Online brokerages are always less expensive than local financial planners.
Reality: There are many expensive premium online brokerages that will charge you just as much or more than a local planner. Trading fees can vary anywhere from $1.50 to $75.00 per transaction at online brokerages so do your homework before you move your money. Our 2008 Online Brokerage Rankings are a good place to start comparing online brokerage expenses.

Perception: Only a local planner or broker can offer face-to-face interaction.
Reality: Strangely, many online brokerages now have local offices across the country if you'd rather ask your questions in person. However, every online brokerage we reviewed except for OptionsXpress charges you extra for broker assisted transactions so you will have given up the cost advantage of online trading if you trade through these local reps.

Perception: The premium you pay for a Financial Planner is a small price to pay for the outstanding investment advice, personal attention, and in-depth research they are providing.
Reality: Are you kidding? Investors aren't buying a custom suit, they should be focused on returns. Paying 12b-1 fees, transaction fees, redemption fees, loads and other fees for great service cuts a big chunk out of your profit. Also remember that local financial planners are constrained by client load, limited to investments in the fund families their company sells, and make a living by charging clients fees. It gets hard to justify paying a lot more for a local planner when you consider that none of these extra expenses we just listed improve the quality of the information they provide.

Another quick way to figure out if you should transition to an online brokerage is to evaluate your personal preferences and investing style. The questions below will tell you whether or not you share many traits in common with the typical online investor.

Do you understand the basic principles of investing?
Online investors prefer to manage their own portfolio. This means that they need to be familiar with and adhere to the basic principles of investing or they could lose a lot of money very quickly. See our 10 Basic Principles of Investing article for more information on this subject. If you don't feel ready to manage your own money responsibly, you may not be happy with the transition to an online brokerage.

Do you prefer to have complete control of your money or do you prefer a helping hand?
Online investors want the freedom to make their own choices and this is one of the major reasons why online investing appeals to them. Online brokerages give you complete control over your portfolio, you can avoid the hassle of always having to go through your planner to make a trade. You will decide what to buy and you will trade however and whenever you want. This appeals to self-directed investors but may be seen as a drawback for investors who prefer a lot of guidance and advice or don't like doing investing research.

Are you willing to learn to use your online brokerage's website?
Don't worry, this doesn't mean you need to be internet savvy, but you must be willing to learn. Many of the online investing sites, such as Scottrade, cater to beginning investors. Others, such as Schwab.com, offer special services such as a "New Client Concierge" to help beginners get acclimated. While most sites try to make it easy for newbies, there's no way around the fact that you will have to learn to use your site's investing tools and trading platform. If you don't have access to a high-speed connection or if you dislike using the internet, online brokerages may not be a good fit for you.

Do you have a clearly defined investing strategy?
All successful long-term online investors have developed a strategy that works for them. Even though you will likely try several strategies over the course of your investing career, it's important to have one in mind from day one. Why? Because it's very difficult to beat the market without a clear picture of your investment selection criteria, risk management plan and investment objectives. Before you transition to an online brokerage, choose and study a strategy that is in line with your investing goals and risk tolerance.

Below are a few final tough questions that you should ask yourself, your financial planner and your online brokerage. If the transition to online investing still appeals to you after reading all three sections of this article, you can make your decision to invest online with confidence.

How disciplined are you?
After leaving your planner, you may still receive great investment advice through investing newsletters or through your own research, but none of that matters if you don't have the discipline to manage your own portfolio wisely. It will be up to you to make trades, stick to your risk management strategy and keep up with your allocation and diversification mix.

How much time do you have?
Saying time is money might sound cliché but it's very true when it comes to self-directed portfolios. If you don't devote enough time to your portfolio you will inevitably trail the market. This is a challenge for those of us that have to balance managing our portfolio with a full-time career and a family. If you are pressed for time but determined to manage your own portfolio, choose a passive strategy such as Index Investing.

Are you prepared to manage your portfolio for the next 5, 10, 20, or even 30 years?
Long-term investors win, short-term investors lose, and that isn't a theory, it's a fact. If you think you'll get bored of managing your own portfolio after a year or two, either stick with your planner or choose a passive strategy that will only require the occasional portfolio checkup.

Ask your planner to explain their strategy and show you how they are implementing it.
This is an important question since only 20% of professional money managers beat the market.

Put together a list of your planner's recommendations. Did they outperform the market?Compare your broker's investments to the strategy he/she claims to follow. Are the recommendations in line with the strategy's selection criteria? For example, if your planner is a value investor, you'd expect to see low price-to-book ratios.Compare the planner's performance to broad and relevant indexes. For example, if your planner invested 50% of your money in international large cap stocks and 50% in domestic large cap stocks, the MSCI EAFE and S&P 500 would be great indexes to use as performance benchmarks.

Ask your planner how they will adjust their strategy over time as your investing goals mature.
As you get closer to retirement, your goals will likely change. You will become more concerned with capital preservation and income and less concerned with capital appreciation. Your planner should be able to clearly explain how he will modify your portfolio since he should already be doing that for other clients that are closer to retirement.

Ask your planner to provide a complete breakdown of the fees you've paid over the last two years.
This is a great test, it can tell you two important things about your planner. First, if they disclose every commission and fee, even the hard to dig out fees such as those paid out of a fund's 12b-1, they have earned some trust. Second, you are dealing with a pretty good money manager if your returns are beating the market after subtracting out all fees and expenses.

Since I provided a list of questions to help you decide when to leave your planner we thought it only fair to provide a list of questions that tell you when to stay. Does your planner outperform the market after fees and taxes are taken into consideration? Do they provide great diversification and broad asset allocation to maximize your returns while minimizing risk? Does your planner provide a complete financial plan including insurance, estate, retirement and tax planning? Do you receive occasional perks such as IPO shares or entry into top performing closed mutual funds? If you answered yes to all of these questions, you should think twice before leaving.

Ask your online brokerage, "What is your specialty?"
Most sites try to find a niche to be more competitive since there are so many online brokerages. For example, SoGoTrade doesn't have a full line of products and they don't have much in the way of research and analysis, but they do offer the lowest stock trade price in the industry at $1.50 per trade. For a list of popular brokerages and what they specialize in, visit our 2008 Online Brokerage Rankings.

Ask your online brokerage How dependable is your web site?
You want a site that won't experience frequent glitches or crashes and that is relatively easy to navigate.

Ask your online brokerage Where can I find a list of all your trading costs and fees?
Fees vary widely.

I recommend you check out the online brokerage reviews for site specific expenses, but here are some rough guidelines for comparison purposes. The average online stock trade is around $9.99 and the average option trade is approximately $8.99 + $0.75 per contract. Other popular assets such as Bonds and treasuries most often trade on a per yield basis, which means that brokerages include the fee in the cost quoted rather than charging a flat amount. Rather than suggesting an average trade price for mutual funds, I suggest beginners look for a broker with 500+ no-fee no-load funds and 2,500+ no-load funds.

How good is your customer service and do you have specialists?
Customer service is especially important to new online investors.

What research and investing tools do you offer that set you apart from competitors?
It's hard for beginners to determine which tools are exceptional and which tools are generic. The easiest way to begin learning which tools have become industry standard and which are exceptional is to browse the Research & Investing Tools category in a few of our individual brokerage reviews. Overall, Ameritrade was 1st in this category since they offer so many of the industry's best 3rd party research and analysis tools for free but Fidelity came in a close 2nd as a result of cutting edge products like Wealth Lab Pro.

Perks and specials?
You will be amazed at the variety of perks and specials online brokerages offer to attract new clients and reward loyalty. A favorite is Vanguard's ultra-low cost Admiral Shares which can provide a significant boost to your long-term returns. Fidelity also offers some great perks. Any Fidelity client with > $50,000 is assigned their own personal financial advisor, a perk usually reserved for high net worth individuals.

This article conveyed the good, bad and ugly of online brokerages and traditional financials planners so that you could feel confident and comfortable with your decision.

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Russia ETF

Did you know that you can find Russia ETF options around energy, finance, consumer and technology sectors? This is not something that a lot of investors realize and most would pigeonhole the Russia ETF opportunities into only one or two of those categories.

With all of these choices, it might be difficult to know which to choose, but that is actually a much simpler issue than you might realize. One approach is consider what’s already in your portfolio and then to look for ways to fill gaps. Are you looking for overall exposure to Russia? Or are you looking to benefit from Russia’s vast natural resources and its hold on a significant portion of the global market share particularly in the energy industry? I would use such requirements to whittle down the list of ETFs to a small set that can then be examined in more detail.

Another option is to gain exposure to Russia with an ETF that focuses on the broader region. For example, Russia is part of a group of countries denoted by the acronym BRIC which stands for Brazil, Russia, India and China. Buying into a BRIC ETF could kill two birds with one stone by giving you some Russian holdings as well as holdings in other countries.

Modernization is a hot topic in the Russian economy, and it is now possible to buy into a diversity of funds in which technologies previously non-existent in the country are making a strong appearance. For instance, SPDR S&P Russia ETF (RBL) has around 20% committed to technologies, while the Market Vectors Russia (RSX) leans heavily on oil and gas instead.

For broad coverage, investors should consider the iShares MSCI Capped Russia Index Fund (ERUS) which tracks the MSCI Russia 25/50 Index which is basically the Russian version of the S&P 500.

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International REIT ETF

Real estate's lustre has certainly dulled recently. At least that's the case in the US. Regardless, real estate is still an important element of diversified portfolio. While may people own their own homes, I've instead decided that buying a house is not the right choice for me. Instead, I aim to keep a certain percentage of my portfolio invested in real estate investment trusts (REITs).

While domestic REIT ETFs have been available for quite some time, exposure to the international real estate market has been missing. Fortunately, the usual suspects have moved ahead with plans to fill this gap.

First to the table is State Street Global Advisers with the streetTracks Dow Jones Wilshire International Real Estate ETF (RWX). This ETF provides easy access to the otherwise hard to reach real estate market in developed and emerging markets countries. Note that a majority of the ETF focus is on developed countries such as Australia, Germany, Japan, and the UK. Also, the ETF isn't purely real estate or REITs due to regulation differences in some countries. In exchange for an expense ration of 0.6%, State Street will maintain investments in 142 of the 161 stock that make up index.

In second place is Barclays Global Investors which reportedly has five iShares exchange traded funds (ETFs) in registration all tied to indexes from the National Association of Real Estate Investment Trusts. These proposed iShares would join a small number of ETFs that invest in REITs, the latest of which follows an international real estate index. I'm looking forward to this one as I seem to have developed quite a strong (unhealthy?) bias for all things Barclays.

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Equal Weight ETFs

Every now and again the debate of equal-weight vs. market capitalization-weight ETFs (exchange traded funds) takes center stage. Depending on who you talk to, one is often cited as being better than the other. I disagree. Both styles provide different investments. So maybe one is better for YOU, but there isn't one style that is better for EVERYONE.

First off, let me describe the differences. ETFs need to determine how much of each constituent company to hold. This is more often than not based on the company's market capitalization. The greater a company's market capitalization, the greater the percentage of the ETFs holdings it will represent. With equal-weight ETFs, every company is allotted an equal percentage of the ETF. This means that a large company such as Microsoft won't have any more influence on the ETF than a small company like RSA Security Inc.

Some people point to the recent performance of equal-weight ETFs as proof that they are superior. But this logic is flawed. The main reason that equal-weight ETFs have done better is that their structure favors smaller capitalization stocks which have done better across the board. Currently, megacaps are "out of favor" and are lagging the market. But one day these larger companies will become the leaders in terms of returns and at this time the ETFs that emphasize these through market capitalization will pull ahead of the equal-weight ETFs.

So the choice of which type of ETF to use depends largely on what else you have in your portfolio. I prefer to use the smallcap ETFs to get my smallcap exposure rather than to figure out how to use an equal weight ETF to achieve the same effect.

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Fundamental Analysis vs. Technical Analysis

There are two primary schools of thought regarding security analysis - fundamental and technical analysis. Fundamental analysis utilizes a much wider range of information than does technical analysis and relies on traditional financial statement analysis. Technical analysis, on the other hand, concerns itself with attempting to identify patterns in past price movements. Both consider macro economic trends to differing degrees, but emphasize the use of firm specific microeconomic data.

Fundamental analysis generally refers to the study of the economic factors underlying the price movement of securities or commodities, not the price movements themselves. For the most part, this form of analysis usually results in longer-term investments and is considered to be a more conservative approach. At a high level, fundamentalists attempt to quantify the current value of a stock by gathering data relating to general industry outlook, overall market conditions, corporate financial strength, historical patterns of sales, earnings, market share, dividends, etc. Using this data they then try to assign a future value to the stock by interpretation and projection. The difference between the current and future values reflects the fundamentalist's assessment of the stock's potential as an investment opportunity. Investment decisions are made based on this fundamental information relative to other opportunities.

Much of the work of the fundamentalist involves accurately projecting earnings going forward and the factors affecting earnings. In theory, the fundamentalist who can make accurate projections and who chooses quality securities when they are under-valued and sells them when they are over-valued can reap substantial profits. Of course, when these assessments are faulty the result is a tendency to maintain a losing position longer than necessary.

Technical analysis is based on the following three principles:

Everything relevant to the value of a company's stock is discounted and reflected in share price.Trends sometimes appear in share price moves and when once started, these trends tend to persist.Activity in the market repeats.

The purpose of technical analysis is to detect the trend or momentum of a stock early so that a good entry or exit point can be selected. Traditionally, charting is the main approach for technical analysis. However, interpreting a chart or an indicator is, at least in part, a subjective issue. Even if you have the knowledge and experience to understand what a chart is telling you, the accuracy is still limited since many trading patterns and some correlative information are not visible or not perceptible directly. The technical analysis generally concentrates on the study of historical price and volume data to detect future trends.

Within the ranks of technical analysis there are two factions - chartists and technicians. While the chartist embraces a more visual approach to the analysis, the technician uses a more quantitative approach and often employs sophisticated statistical methods. Chartists refer to line studies such as trendlines, triangles, speed resistance lines, Gann angles, and the like. Technicians employ technical indicators which usually are variations of common statistical methods such as ordinary least-square regression, exponential moving averages, etc. Whereas fundamental analysis allows you to make an informed determination of a company's current share valuation, technical analysis aims to improve the timing of your investments.

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401K Guide and History

Are you contributing to a 401K, IRA or Roth IRA? You should be! This guide explains everything you need to know about these wonderful tax-free wealth building tools.

I'll cover the 401k first because that's the one that seems to prompt the most questions. One of the first things I want to stress to you is that employers have handed over the responsibility of retirement planning to you, pension plans are pretty scarce today unless you work for the government and even those are starting to disappear. The sad truth is that most Americans are terrible at long term planning, and many that aren't contributing to a 401K plan will have to work until at least social security age and probably after if they want to have anywhere near the standard of living during retirement that they are accustomed to while working.

When our parents were working in the 50's, 60's and 70's, employers were expected to provide for employees in retirement. If you paid your dues by working for a single employer for an entire career, most would in turn provide you income in your retirement. While pension income might be less than you made when you were working, you could at least count on continued paychecks. This gave people the means to retire even if they never saved a penny.

In the late 70's, congress added a section to the Internal Revenue Code - Section 401(k) in which employees could avoid taxes on dollars contributed to deferred compensation plans. This program was intended for executives but companies were quick to interpret the legislation for their own benefit. The major reason for the explosion of 401K plans is that they allow employers to spend so much less on employee retirement planning. Rather than paying a pension until the retired employee passes away, a 401K plan only requires that employers cover the administration and support costs plus any company match programs during employment, there is no additional expense after the employee retires.

This concept is much easier to grasp with an example. Let's say that Joe worked for 30 years and earned $60,000 per year at retirement and that his employer's policy is to provide a pension equal to 70% ($42,000 per year) of his highest income. If Joe retires and then lives another 30 years, the employer will have to pay him 30 X $42,000 = $1,260,000.

If, on the other hand, Joe's company provides a 401K plan that matches 5% of his income the picture is quite different. For simplicity, let's assume Joe earned $60,000 every year that he worked. Let's say that the company pays $2,000 per year for various 401K plan administration expenses related to Joe's account. In addition, they match 5% of his income, $3,000, in the plan for 30 years. The employer's total liability for Joe's retirement benefits is ($2,000 admin & support X 30 years ) + ($3,000 company match X 30 years) = $150,000.

By switching from a pension to a 401K the company saved $1,110,000. From an employer's perspective, this huge expense savings represents a tangible long term benefit for the company and for shareholders. Oh wait, what about those pesky ethical implications? Don't forget that the average American is terrible at saving money and even worse at investing it and that most people are not long-term thinkers. Not to mention the fact that when you dump retirement planning responsibilities on people that weren't prepared or properly educated, you have just added a huge burden to taxpayers in the future and subtracted value from American society in general nah, we won't worry about any of that. Okay, time to step down off our soap box before someone pushes us, what's done is done and we have a lot to cover.

I'll at least end the history section on a bright note. You can definitely retire wealthy using a 401K if you're properly educated and, luckily, you're on the right track by reading this article.

Here's a break down of what you need to learn into easily digestible chunks:

Benefits of a 401KHow it all works (tax deferral, payroll deduction)Contribution limits & recommendationsRetirement Distributions and Hardship Withdrawals

The two greatest benefits of a 401K are that they reduce the taxable income you have to report to the IRS and once money is in a deferred account you can invest tax free until you withdraw the money at retirement. Rather hear that in English than in accounting-speak? Alright, for example, when we say you reduce your taxable income, that means that if you earn $50,000 per year and contribute $5,000 to a 401K you only have to report $45,000 to the IRS when you file your taxes. If you are in a 24% tax bracket, this saves you $1,200 ($5,000 X 24%) in taxes. When I say money in a deferred account is invested tax free it means that you will never pay taxes on capital gains, dividends, coupons payments or any other form of profit. The only time you will ever pay taxes is when you withdraw the money.

What makes stock market investing the greatest wealth-building tool the world has ever seen? Compound interest. While this might sound very "mathy" and boring, I want you to get excited when I talk about compound interest because it's the closest thing to magic you're ever going to see in real life. Albert Einstein once declared that compound interest is "the most powerful force in the universe" and I agree because it certainly has made a lot of people rich. It's a simple concept and is best demonstrated through examples so let's compare a 401K portfolio to a taxable portfolio.

In this example, you're going to contribute $10,000 per year. In addition, you decide to put all your money in index funds so that you can get the average market return which has been about 10% historically. In the 401K plan you will pay zero taxes, in the taxable account we'll assume 24% of your profit is lost in taxes. After 30 years, the 401K will have grown to $1,644,940 (and this doesn't include any company match) and the taxable account will have grown to $1,052,974. The 401K grew 56% more than the taxable account. Albert was right, he must have been a pretty smart guy.

While I blasted companies for taking away pensions and rolling people into 401Ks in the history section, 401Ks are actually a pretty strong investment vehicle if you take full advantage and work for a company that provides a wide variety of investment options.

Most companies will offer to automatically deduct 401k contributions from your paycheck, you should definitely choose this option if it's available. This saves you the headache of figuring out your taxable income when you file taxes because your W2 will adjust your taxable income by the amount you invested into your 401K. This also means that you don't have to worry about whether or not you have the will power to set aside savings from your earnings. Since it is automatically deducted you'll never see this money in your check, the contributions will go straight to your 401K. About 80% of Americans don't save a penny from their regular pay, so for most of us, automatic contributions into a 401K allow us to avoid the instant gratification spending urge and will-power issues.

Another benefit is that 401K contributions are not a straight line reduction to your income. Huh? This means that if you choose to automatically contribute 15% to your 401K, your paycheck will not decrease by the full 15% because of the tax benefits associated with tax deferred accounts. For example, let's say you earn $50,000 per year and you are taxed at 24%. You will bring home $38,000, right? Now let's say you decide to contribute 15% of your salary ($7,500) to your 401K. Many people assume this means a 15% reduction to take home pay but your take home pay actually only goes down by 11% as a result of the $1,800 tax break you received on the $7,500 you contributed to your 401K plan ($7,500 X 24% tax bracket = $1,800 tax break).

The next topic is Maximum 401K contributions. In 2008 you were allowed to contribute $15,500. This is the amount that YOU are allowed to contribute. Any company match is not counted against you so technically the maximum contribution is $15,500 + your company's match amount.

How much should you contribute? In our opinion, the old rule of 10% to savings no longer applies, the new minimum is at least 15%. Why? Because the good old US of A ain't what it used to be. You're not as likely to have a pension, the dollar isn't the strongest currency in the world any more, and social security may face reductions in the future since it is the largest expense in the federal budget and will eventually face major solvency problems. Save 10% or less and your lifestyle will be seriously cramped when you try to retire, you may even have to postpone. If, on the other hand, you form the habit of saving at least 15% and invest wisely you should be able to live comfortably when you retire without having to fret over running out of money or every dollar spent.

Typically, companies offer some kind of employee match and you should always take full advantage of this free money. For example, if your company offers a 100% match up to 5% of your salary and you make $50,000 per year, they are basically giving you $2,500 as long as you put at least that much of your own money into the 401K plan. Just like your contributions, the company match goes straight into your tax deferred account. In this example, if you contribute $2,500, they will match and now you have a total of $5000 which means an instant 100% return on your investment. Strangely, many people don't contribute to their 401K and therefore don't take advantage of the company match Are you kidding??? Don't pass up free money.

When you reach the age of 59 ½ you can take a lump sum distribution minus a 20% withholding tax, a small price to pay considering all those years of tax free investing. If you don't want the lump sum, you can also choose to either start receiving retirement distributions, which will also be taxed at 20%, or you can leave the money alone. However, at age 70, you will be forced to start taking minimum distributions. Luckily, if you're forced to withdraw, some of these dollars can be rolled into another tax deferred account called an IRA which is covered in detail in the IRA, Roth IRA, and Roth 401K Guide.

The question I dread the most is "can I withdraw money early?" Unfortunately for many people who have made this costly mistake the answer is yes. It is possible to withdraw money and even borrow against your 401K, especially if you meet a hardship qualification, but this is a very bad idea. Every penny you take out or borrow delays your retirement.

However, I want to provide a complete guide so we will tell you that avoidance of foreclosure, medical expenses not covered by insurance, and permanent disability are examples of common hardship qualifications. Even if you meet these qualifications your withdrawal will be subject to a 10% withdrawal tax penalty in addition to your normal tax rate. This means that if you're in the 24% tax bracket and you take money out for any reason Uncle Sam is going to add a 10% penalty and take 34% of your withdrawal in taxes. The Roth 401k will allow you to withdraw funds without paying taxes or penalties, and I will discuss this type of 401K below, but taking money out of your retirement fund is still a BAD idea.

The tax free investing offered in a 401K account is your best opportunity to build wealth and save for retirement. Take full advantage and contribute every penny that you can afford. Also make sure you manage your portfolio diligently, don't leave it up to your planner or your company. We have a large library of free investing information on this site. Please help yourself to as much as your brain can hold and keep coming back until you're comfortable managing your own portfolio. You're always better off when you manage your own money, who else will care as much as you do about your nest egg? That definitely doesn't mean you shouldn't seek expert advice, we recommend that you do, but learn enough to be able to validate any advice that you're getting.

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